Does Bitcoin lack hedging properties? Reviewing the contrarian rise of gold in 2008

Since its inception, Bitcoin has been seen by investors as a hedge asset, with its scarcity, inability to be counterfeited, and divisibility being viewed by the crypto community as a store of value, hence earning it the title "digital gold." Bitcoin was born in the midst of the 2008 financial crisis. However, when faced with the most recent financial crisis, Bitcoin did not stand out on its own, but rather experienced a sharp decline along with various traditional assets and indices. In light of this, the crypto analytics firm Messari reviewed how "gold" performed in 2008 in this report.

As of today, the price of gold has been on the rise since March 20th, and the price of Bitcoin has also rebounded. This report, released on March 17th, may indeed have some reference value.

Below is the translation from Messari's report:

Since the panic selling caused by the coronavirus, Bitcoin has inevitably fallen in sync with traditional assets. The positive correlation between Bitcoin and traditional risk assets is disappointing, which leads us to understand that institutions may hold more Bitcoin than we expected.

Traditional assets not only taught Bitcoin a lesson but also seemed to have tamed Bitcoin, causing Bitcoin to wait for their every move. The correlation between the S&P 500 index and Bitcoin in the chart below explains it all.

The correlation between Bitcoin and traditional assets has made many investors question its safe-haven status. As we have previously discussed, we believe that Bitcoin is not a hedge against financial recession but rather a hedge against the fiat system. In addition, short-term correlation does not imply long-term positive correlation, and we can delve into this by comparing Bitcoin with its traditional asset counterpart, "gold".

Gold and the 2008 Financial Crisis

On March 16, 2008, the 85-year-old investment bank Bear Stearns was acquired due to bankruptcy concerns, and the gold price plummeted along with the S&P 500 index. On September 15 of the same year, Lehman Brothers went bankrupt, leading to the most severe liquidity crisis for gold in years.

Several weeks after the collapse of Lehman Brothers, the government issued a series of seemingly bullish fiscal stimulus measures for gold. However, gold continued to fall in sync with all assets. In a liquidity crisis, all asset correlations are the same.

Gold eventually hit bottom in November 2008, starting an incredible bull market. After implementing the most aggressive monetary policy measures in history, gold surged 168% due to inflationary effects, rising from $704.9 on November 13, 2008, to $1,888.7 on August 22, 2011, reaching a historical high.

A Lesson for Investors from Bitcoin

It is certain that the current financial crisis is different from that of 2008. Although back then, concerns about central bank-induced inflation led to a rise in gold, the public's expectations for the market may have changed now. Global central banks have taken action, including the Fed cutting interest rates to zero and initiating a quantitative easing (QE) plan of up to $700 billion, but this has not triggered investor concerns about inflation. The expected inflation rate in the next 5 years has indeed decreased.

Note: The 5-year expected inflation rate is proposed by the Federal Reserve Bank of St. Louis, calculated using 10-year and 5-year US Treasury bond yields and can be used as a benchmark for market expectations of inflation within the next 5 years.

We can understand that in the same context, it is not to say that Bitcoin can perfectly replicate gold's performance after a financial crisis but that subsequent trends often take a long time to brew. Short-term performance does not represent long-term trends, and the real show is just beginning.

Further Reading

• [Coinbase Blog] Bitcoin's Disconnect from "Unrelated Assets" May Only Be Temporary
• "Principle" Author: Bitcoin's Volatility, Gold Will Become a Safe Haven Asset in Economic Downturn

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